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While I look forward to a debate on the wider issue of whether investment banking should be split from commercial banking, I must remind my noble friend Lord Williams that the purpose of the definition of investment banks set out in this new clause is purely and exclusively to provide a definition for the purposes of the insolvency procedure enabling power in these new clauses. Therefore, any attempt to change the definition here would apply to investment banks in

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that regard only and would not address the wider questions that I believe are the intended purpose of his amendments.

At this point, it may be appropriate for me to give way to my noble friend and other noble Lords who have tabled amendments to my amendment to enable them to speak to them.

Amendment 174DZA had been retabled as Amendment 174DE.

Amendment 174DA (to Amendment 174)

Moved by Lord Williams of Elvel

174DA: After Clause 227, line 10, at end insert—

“(d) underwriting the issue of securities, or

(e) taking deposits for the purpose of the regulated activities.”

Lord Williams of Elvel: It may be convenient for the Committee if I speak to the whole of the group rather than just to the initial amendment. My noble friend has been kind enough to say that I wish to raise a debate about the principle of investment banks and commercial banks, and he is right. In introducing this new definition of investment banks, he said that it was for the purposes of insolvency legislation only. Parliament is perfectly entitled to rewrite the definition and the basis on which it is intended.

I would like my noble friend to address the problems that I addressed on Second Reading. First, it is very difficult to see how the taxpayer could compensate investment bankers who have been dabbling in securities. It is easy to see how we can compensate commercial banks—high-street banks—with taxpayers’ money, but I find it difficult to see how the taxpayer could properly compensate people who have lost money dabbling in what I would call something of a casino. The recent takeover of Merrill Lynch by the Bank of America, in which Merrill Lynch exposed some extraordinary losses, has made that point.

Secondly, although I do not want to repeat all that I said on Second Reading, I want to reiterate that commercial banking and investment banking involve different skills. I have been involved in both, and I know that. It may be time to get back to a bit of sense whereby commercial bankers say that they are commercial bankers who do not dabble in securities and investment bankers say that they run securities businesses and do not go on to the high street collecting deposits from the public.

My amendments address the question of the definition of an investment bank. Amendment 174DA relates to underwriting securities, Amendment 174DB addresses foreign investment banks which may or may not be incorporated under UK law, and the other two amendments make it clear that a bank as defined under Clause 2 cannot wholly or partially own an investment bank, so that the two operations are completely separate.

I recognise that my drafting is not perfect and that it would require time, effort and study to get from where we are now to where I would like to be. I therefore have a good deal of sympathy with Amendment 203, tabled by the noble Lord, Lord

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Newby, which requires a review after a period of time. However, if my noble friend is saying, as he did on Second Reading, that the Bill is meant to be a permanent Act for the regulation of the banking industry—and I do not think that we will get another Banking Bill for a few years—then it needs to include a provision to enshrine the principle that investment banks and commercial banks are different animals. We should make provision to that effect.

Lord Newby: The Minister is right that the amendment tabled by my noble friend Lord Oakeshott and me is designed to raise a broader public policy debate about bank regulation. It covers not just banks covered by the Bill but the entire banking system. A number of things have become clear during the banking crisis: there was mismanagement of the banks; many bankers were grossly over-rewarded; and those bankers had no sense of the broader community around them. We know all those statements to be true because the noble Lord, Lord Myners, made them in his interview at the weekend.

We know that there have been major regulatory failures; we saw it in relation to Northern Rock and we have seen it now more generally. Banks were behaving recklessly; their accounts were almost meaningless because they were propped up by toxic assets and the FSA was not on top of it. As I understand it, in regulating the banks the FSA divides itself into wholesale and retail divisions, and Barclays has to date been regulated by the retail bit of the FSA, despite the fact that the major risks facing Barclays come from the wholesale banking side of the bank. I also understand that Standard Chartered is regulated entirely by the wholesale team, despite the fact that outside the UK it has major retail deposits.

That demonstrates the failure of the current regulatory regime. There is now widespread recognition, including by the FSA and the Government, that there needs to be a fundament review of the regime and reform in the way that the banks are regulated. The current plans have a number of features. There is to be a review of remuneration and capital adequacy rules, and we are moving into an interesting phase in which there is a sort of planning agreement—I am sure that the Government would not want to use that phrase; they are calling it a lending agreement—under which the Government will provide support for the banks in various ways if they can reach an agreement on the quantity and type of lending made available across the country.

7.30 pm

In the spring, the Government will publish proposals for the regulatory framework of the banks, together with the FSA’s review. My Amendment 203 suggests a direction under which that regulatory framework might operate. It takes as its starting point the fact that banks, at least in terms of their deposit-taking activities, are de facto utilities. That is the clear implication of the lending agreement framework, and of the other steps that the Government have taken. Further action may be required to keep the sector afloat. This means that the banks cannot be treated like any other enterprise.

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Despite all the talk during the passage of the Bill of arm’s-length dealings with the banks, the Government are now intervening in the core business strategies even of those banks in which they do not yet have a shareholding. The proposal in Amendment 203 is that the Government contemplate separating investment banking from deposit-taking, either entirely or in a clearly segmented holding company. Such a move—in the spirit of, but not exactly replicating, the Glass-Steagall Act—would insulate the element of a bank’s activity that most affects individuals and overall bank stability from the more risky practices engaged in by investment banks.

This proposal has wide support from a range of commentators and from the OECD, which a couple of weeks ago in its twice-yearly review on trends in financial markets said that, as a result of regulatory and governance failures, inherently risky investment banking businesses had been able to raise capital too cheaply, leading to a build-up in debt that contributed to the current financial crisis. The OECD said:

“These businesses benefited from a too low cost of capital and, commensurately, they became too large ... as a consequence. When embedded inside a financial conglomerate like Citi or a European universal bank like UBS, excessively large investment bank segments put those entire institutions at risk”.

There are two approaches that one could adopt. One is advocated by the noble Lord, Lord Williams. The other is to allow deposit-taking and investment banking to be undertaken by a single holding company, but as separate legal entities. I have no preference between the two. In either case, with a clear segregated structure, it would be much easier to have the appropriate level of regulatory regime for each type of banking activity.

There are a number of arguments against it. The bankers argue that it is extremely complicated and costly and puts the clock back. In one sense, that is exactly what it seeks to do. Some people argue that it would be costly to consumers because, in the past, investment banking profits have subsidised the retail banking side. That is fine when the flow goes in that direction. However, when the investment banking side collapses, as it has, the argument no longer applies. It certainly does not apply at the moment. It is also argued that it goes against what is happening with some banks in the US, where Merrill Lynch has been taken over by Bank of America, and Bear Stearns by JP Morgan. However, Citigroup moved in the opposite direction just last week when it in effect adopted the proposal of the noble Lord, Lord Williams, and split the investment and deposit-taking sides of its activities.

None of these arguments undermines my basic premise. Greed, vanity and recklessness have brought the big UK clearers to their knees, in considerable measure through their over-risky investment banking activity. The Government are undertaking a review of the framework of the banking sector, and the amendment would require them to look at the case for separating investment banking from deposit-taking. I commend it to the Minister and to the Committee.

Baroness Noakes: Amendment 174DE is an old fashioned amendment compared with the debates we have just had, because it is an amendment to the

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Government’s amendment. I propose the deletion of subsection (6) of the Minister’s new clause, introduced by Amendment 174D, which gives the Treasury the broad power to say what an investment bank is and what client assets are. However, if the Government cannot define what an investment bank and client assets are, they are not ready to bring forward a power of such magnitude. It requires Parliament to take too much on trust about the final outcome of the legislation. However, as I say, this is an old fashioned intervention.

Lord Northbrook: I rise to support the amendment of my noble friend Lady Noakes. Surely conditions 1, 2 and 3 in subsections (2), (3) and (5) of the proposed new clause are sufficient definition. I do not see why the Treasury needs this wider order, particularly in subsection (6)(a), to specify the class of institution to be treated or not treated as an investment bank.

Lord Myners: I have listened with interest to the amendments proposed by noble Lords. I start with those proposed by my noble friend Lord Williams of Elvel. I will set out why I believe that the scope of the investment bank insolvency regime regulations are best expressed by the Government’s proposed new clause, without the changes proposed by my noble friend.

The first amendment adds to the list of regulated permissions that an institution needs to have, under Part 4 of the FSMA 2000, in order to be defined as an investment bank for the purposes of the scope of this enabling power. I believe that the intention of the noble Lord was to ensure that the definition of “investment bank” included a sufficiently wide list of activities to capture all relevant institutions. However, I again remind noble Lords that this definition of investment bank only has a bearing on the scope of the regulations that could be made under the new enabling power to introduce a new insolvency regime for such institutions.

I believe that the amendment I have tabled is more appropriate for two reasons. To be brought into the scope of the new insolvency regulation-making power, an institution must satisfy certain conditions. Condition 1 is predicated on the permissions for regulated activities under the FSMA, which are clearly defined and therefore unambiguous. The first activity featured in my noble friend’s amendment,

forms part of the regulated activity—

included in condition 1, and is therefore already covered. The second activity,

is incidental to other regulated activities and does not need to be covered.

Secondly, my amendment will include a provision under which the Government can change the scope of any regulations that may be introduced, subject to parliamentary approval. Again I remind the House that this flexibility is necessary, as the Government’s review may identify other institutions that should or should not be subject to the regulations. I believe that this observation addresses the closing comments

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of the noble Baroness, Lady Noakes, on the definition of an investment bank. I will come to client assets in a moment.

The second amendment tabled by my noble friend intends to expand the scope of the regulations. Again, I believe that the intention of the noble Lord was to ensure that the definition of “investment bank” was sufficiently wide. However, I again remind noble Lords that this definition of investment bank only has a bearing on the scope of the regulations that could be made under the new enabling power to introduce a new insolvency regime for such institutions. I believe that the effect of the noble Lord’s amendments would be to expand the scope of the definition of investment banks to all entities that carry out such business in the UK, including UK branches of foreign investment banks, so that any new UK insolvency regulations would also apply to such institutions. It is not the Government’s intention to provide for this.

With regard to branches of EEA firms, under EC law the UK Government cannot interfere with the insolvency arrangements of an institution whose home state is not the UK. In relation to the branches of non-EEA firms, the Government do not wish to interfere with the arrangements that the home country may make to deal with an insolvent parent and that parent’s UK branch. Members of the Committee should also note that the rest of the Banking Bill does not apply to UK branches of foreign banks for similar reasons.

The last two amendments tabled by my noble friend Lord Williams seek to ensure that the definition of “investment bank” could not apply to an institution that also takes deposits within the meaning of Clause 2 or that has a deposit-taker as a parent. Again, I believe that my noble friend’s intention was to spark a debate on whether investment banks should also be, or be associated with, regulated deposit-takers—commercial banks. However, I remind the Committee that this definition of “investment banks” only has a bearing on the scope of the regulations that could be made to introduce a new insolvency regime for such institutions. As such, the effect of my noble friend’s amendments would be to prevent the insolvency regime regulations applying to an investment bank that was also, or associated with, a deposit-taker.

Lord Williams of Elvel: Does my noble friend have no view at all on the principle that I have expressed?

Lord Myners: I assure my noble friend that not only do I have a view but I expressed it at Second Reading and will do so again in a moment, if he would have some patience. The Government believe that the scope of the regulations should be able to coexist with other insolvency procedures that might be applied to a deposit-taker—for example, the bank insolvency procedure—and that institutions holding a permission under the FSMA to accept deposits should not be automatically excluded from the scope of the new insolvency regime.

There are of course considerations to be made as to how any special insolvency regime for investment banks would fit alongside such schemes as the bank insolvency procedure under Part 2. But the regulation-making power in government Amendment 174F will allow us

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to make provision as to how such schemes will work together. In short, the Government believe that this flexibility should be retained for the enabling power, as an investment bank could also have a deposit-taking business. Indeed, several such banks are in existence. If the review recommends that the new insolvency regulation should be drawn up for the insolvency of investment banks, it is likely that we would want to bring such institutions into their scope.

Having discussed my noble friend’s amendments and the specific effect that they would have on the Government’s intended policy in this area, I will now return to the wider debate on the so-called Glass-Steagall issue. The question is whether there is a case for splitting the business of banking between its utility functions, such as deposit-taking on one side, and its more speculative investment functions, which could be loosely referred to as investment banking, on the other.

Amendment 203, tabled by the noble Lord, Lord Newby, proposes a new clause that would require the Government to produce a report that examines this question and to report within the year. Members of the Committee will appreciate that this question is one part of the wider debate that policy-makers around the world are having on an ongoing basis on the appropriate form that financial service providers, and particularly those institutions that act as intermediators of capital, should take in the future in the light of the financial instability that we have experienced throughout the world in recent months and years.

I assure the House that the Government, along with their international partners, will consider the policy questions posed, along with many other questions and possible solutions related to the goal of reaching a more stable financial system. However, I do not believe that this goal is best served by requiring the Government to have a period of one year in which to respond on one specific point. I believe that this question is best addressed as part of the wider work I have just mentioned and that the timetables of any announcements should rightly depend on the progress made with the UK’s international partners.

7.45 pm

The noble Lord, Lord Newby, suggested that the response of others to his amendment and those of my noble friend Lord Williams might be that we were putting the clock back or, perhaps I may suggest, trying to put the toothpaste back into the tube. The noble Lord, Lord Newby, pointed to Citibank, which appears to be splitting its utility function from its investment bank, although there was little specificity in its announcement and it is not entirely clear how far it would intend to go. But that is juxtaposed with the fact that the Bank of America has only recently concluded the acquisition of Merrill Lynch. Goldman Sachs and Morgan Stanley have gone the other way and have registered as bank holding companies, having previously been investment banks.

The noble Lord, Lord Newby, mentioned the interview I gave to the Times, as reported on Saturday. As I have previously said in this House, there has been

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mismanagement of the investment banking arms of a number of our major banks, which, in part, is due to an absence of appropriate supervision and the consequences of asymmetrical incentive schemes. The FSA in its very forthright and honest response to the collapse of Northern Rock admitted to a number of shortcomings in its own regulatory engagement with that institution. The FSA’s new chairman, the noble Lord, Lord Turner, is carrying out a fundamental review of regulation and the operation of the FSA.

In parallel to that, we are in discussions with the G20 countries and the Financial Stability Forum to see what lessons can be learnt as a consequence of the failures that we have seen. Clearly, it would not be acceptable simply to say, “This has all been rather unfortunate, but let us put that behind us and move on”. There is a clear need to recognise that we need a series of responses across intergovernmental bodies, regulation, supervision and institutional shareholder engagement.

It is also worth pointing out that the investment banking arms of hybrid or diversified banking institutions were not only, as the noble Lord, Lord Newby, indicated, for some time apparently subsidising the commercial and retail banking arms—I say “apparently” because one has to say that possibly some of the profits that were reported were somewhat illusory or at least slipped away, although not always before large bonuses had been paid to those who claimed responsibility for generating those profits—but developed new methods of managing risk and pricing risk, which were of value to the banks’ commercial and private retail customers. We simply somehow morphed into a situation in which these generally beneficial consequences of these larger organisations went to a situation where the investment bank became the dominant force within the organisation. International co-operation, improved regulation and, very importantly, improved supervision—including effectiveness of boards of directors and remuneration—and risk management processes are capable of offering significant progress.

Lord Eatwell: Does the Minister agree that my noble friend Lord Williams and the noble Lord, Lord Newby, might draw some comfort from the Group of Thirty report published last week, which suggested that there should be a separation of commercial banking and investment banking, particularly given that the committee which produced the report was chaired by Mr Paul Volcker, whose position in the new American Administration suggests that he will have a significant influence on the development of regulatory structures in the future?

Lord Myners: I am not familiar with the G30 report to which my noble friend Lord Eatwell refers but I shall certainly make sure that I study it as soon as I have an opportunity. I would not be surprised if the noble Lord, Lord Turner, considers in his review the issue of large organisations.

Lord Northbrook: Will the Minister prevail on the noble Lord, Lord Turner, to give us the benefit of his wisdom in the House? He has been making some very interesting speeches outside the House but we have not had the benefit of his counsel on these matters.

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Lord Myners: Inasmuch as prevailing on the noble Lord, Lord Turner, is not seen as an intrusion on his independence, I shall seek to convey to him the fact that his appearance in the House will always be welcome and appreciated, particularly his contribution on matters relating to financial regulation. As I said, it is quite possible that he will include this in his report, but I wait to see whether that is the case.

The noble Lord, Lord Newby, raised questions about the internal operation of the FSA in connection with the regulation of Barclays and Standard Chartered. I am afraid that I am not in a position to comment on that.

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